Question

Calculate the present value of a stock if this stock is expected to pay $10.60 dividend in the next three years and then $15 for year 4 to year 6, and in year 7 and thereafter it pays $20 constant dividend forever. Assume investors opportunity cost of investment is 10%. provide excel formula in your answer and briefly explain the steps in your calculations

Answer 1

First stream is 10.60 for year 1,2,3
Second stream is 15 for year 4,5,6
Third stream is 20 for year 7,8....

Value at t=0 first stream=Present value of ordinary annuity=PV(10%,3,-10.60)=26.36

Value at t=3 for second stream=Present value of ordinary annuity=PV(10%,3,-15)=37.30

Value at t=0 for second stream=Present value of future lumpsum=PV(10%,3,0,-37.30)=28.02

Value at t=6 for third stream=Present Value of perpetuity=Amount/rate=20/10%=200.00

Value at t=0 for third stream=Present value of future lumpsum=PV(10%,6,0,-200)=112.89

Total Present Value=PV(10%,3,-10.60)+PV(10%,3,0,-PV(10%,3,-15))+PV(10%,6,0,-20/10%)=167.28